China signals focus on reforms and leaner, cleaner growth

Kevin Yao, Xiaoyi Shao

6 Min Read

BEIJING (Reuters) - China sent its strongest signal yet that its days of chasing breakneck economic growth were over, promising to wage a “war” on pollution and reduce the pace of investment to a decade-low as it pursues more sustainable expansion.

An attendant serves tea for China's President Xi Jinping during the opening session of the National People's Congress (NPC) at the Great Hall of the People in Beijing, March 5, 2014. REUTERS/Jason Lee

In a State of the Union style address to an annual parliament meeting that began on Wednesday, Premier Li Keqiang said China aimed to expand its economy by 7.5 percent this year, the highest among the world’s major powers, although he stressed that growth would not get in the way of reforms.

In carefully crafted language that suggested Beijing had thought hard about leaving the forecast unchanged from last year, Li said the world’s second-largest economy will pursue reforms stretching from finance to the environment, even as it seeks to create jobs and wealth.

After 30 years of red-hot double-digit growth that has lifted millions out of poverty but also polluted the country’s air and water and saddled the nation with ominous debt levels, China wants to change tack and rebalance its economy.

“Reform is the top priority for the government,” Li told around 3,000 hand-picked delegates in his first parliamentary address in a cavernous meeting hall in central Beijing.

“We must have the mettle to fight on and break mental shackles to deepen reforms on all fronts.”

Idle factories will be shut, private investment encouraged, government red-tape cut and work on a new environmental protection tax speeded up to create a greener economy powered by consumption rather than investment, Li said.

To aid the transformation, China’s economic planner, the National Development and Reform Commission, told parliament the government will target 17.5 percent growth in fixed-asset investment this year, the slowest in 12 years.

Investment is the largest driver of China’s economy and accounted for over half of last year’s 7.7 percent growth by rising 19.6 percent, above an 18 percent target.

Asian currencies rose on the news that China’s $9.4 trillion economy will stay on an even keel after its wobbly start for the year. Investors had been worried by speculation that China may announce a cut in its growth target this week.

“Given that GDP growth is expected to be 7.5 percent for ‘longer’, we see this target as supportive for the Asian region, trade, and for commodity currencies,” said Annette Beacher, an analyst at TD Securities in Singapore.

Others were less optimistic.

By declining to lower its 7.5 percent growth forecast, China is betraying its refusal to break with the past, some analysts said. That means Beijing may not be as radical in reforms as hoped.

“It’s a sign that maybe they are not going to tackle credit growth as quickly as we thought they might,” said Julian Evans-Pritchard, an economist at Capital Economics in Singapore.

NATURE’S RED-LIGHT WARNING

China’s annual parliament meeting is a carefully choreographed affair, generally devoid of real debate to portray unstinting support for the government’s one-party rule.

And as China’s maturing economy grinds towards a more modest pace of expansion - 7.5 percent growth would be the weakest in 24 years - Beijing is increasingly wary of any outburst of social discontent.

Before the parliament meeting began, a Reuters reporter saw police drag away two protesters from Tiananmen Square, the site in central Beijing of a bloody crackdown on pro-democracy demonstrations in 1989.

Aware that one of China’s pressing needs is to close sharp income disparities, Beijing announced ambitious reforms at a Communist Party plenum meeting in November that switched to slower but better-quality expansion, from investment- and export-fuelled growth.

Wednesday’s announcements suggested it is well on track, but moving cautiously.

Analysts have warned in the past that China will be unwilling to rock the boat when it comes to reforms for fear of fuelling job losses and undermining social stability. As such, they say difficult changes such as government downsizing or closures of debt-laden factories are likely to take a back seat.

Li repeated the government’s standard rhetoric on financial reforms, saying authorities will widen the yuan’s trading band, relax its grip on the currency and insure deposits, but he did not give a time line.

On the environment, which has become an issue of increasing concern in China, he did not mince his words.

“Smog is affecting large parts of China,” Li said in his address that lasted a little over 100 minutes. “Environmental pollution has become a major problem, which is nature’s red-light warning against the model of inefficient and blind development.”

He said the battle against pollution will be waged via price reforms to boost non-fossil fuel power and cutting capacity in the steel and cement sectors, China’s largest air polluters.

Yet plans to cut steel and cement capacity comprise just a meager 2 percent to 2.5 percent of total capacity, and shutdowns may even be outstripped by new capacity under construction, although this will be more modern and less polluting.

And with many steel and cement factories already driven out of business by falling demand, some analysts question China’s willingness to go the extra mile on pollution .

“Now, it is easy to impose environmental controls because 90 percent of steel mills are losing money,” said Xu Zhongbo, a Beijing-based consultant in the metals sector.